Kentucky Department of Agriculture

New-crop corn and soybean prices are near record highs, and in contrast to last year, planting conditions generally look good throughout Kentucky this spring. Due to the unseasonably warm weather in March, we are likely to have an early spring planting season. Because crops are not yet in the ground but we have good pricing information (including crop insurance price parameters), this is a good point to estimate corn and soybean profitability to help guide farmers in their final planting decisions.

New-crop prices are estimated at $5.40 per bushel for corn and $13 per bushel for soybeans. Soybean prices have increased in value considerably in the last two months relative to corn. This is the market trying to pull some of the acres from corn back into soybean production.

Fertilizer, fuel, and other input prices are near levels seen in 2011. However, we have had some upward movement in urea prices in the last few weeks. This will have the most impact in central Kentucky where this product is typically used. Nitrogen (N) price has a big impact on relative profitability between corn and soybeans because only corn uses this input. In this analysis, anhydrous is assumed at $840 per ton or 51 cents per unit of N. DAP and Potash are assumed at $650 per ton 51 cents per unit) and $630 per ton (53 cents per unit), respectively.

Custom machinery rates are used to estimate machinery costs (fuel, repairs, labor, depreciation, and overhead). These rates were increased 25 percent to account for the likelihood that most custom operators have excess machinery capacity and may not fully account for their fixed costs when negotiating rates (see Custom Machinery Rates Applicable to Kentucky - 2012 (http://www.ca.uky.edu/cmspubsclass/files/CustomRatesKentucky2012.pdf). Fuel is assumed at $3.50 per gallon, and trucking is assumed to be 15 one-way miles. For central Kentucky, urea is priced at $560 per ton (61 cents per unit), and trucking is assumed to be 75 one-way miles.

Three soil productivity levels are used in this analysis and can be seen in Table 1. This is important because better quality soils will have higher profit potential (before accounting for differences in land rents). P and K application rates are assumed to be at removal rate of the crop and thus fertilizer costs will change based on productivity level of the soil. Nitrogen rates are also assumed slightly higher as we move up in productivity level. A final critical budget assumption is that the gross profit estimated here does not include land rent since it varied so much throughout the state. Subtract land rent from gross profit to get net profit.

Table 2 summarizes cost per acre in western Kentucky for 150 bu corn and 45 bu soybeans. Total input costs were estimated at $261 for corn and $123 for soybeans. Total machinery and labor were estimated at $121 for corn and $85 for soybeans. Total other costs were $69 for corn and $44 for soybeans. Total costs excluding land rent totaled $452 for corn and $251 for soybeans.

Table 3 summarizes the gross returns (all costs except land rent) for the three soil productivity levels using current forward contract prices (March 21). Soybean returns are higher on the 125 bushel corn ground but corn returns are higher on the better soil classes. A 50-50 rotation is expected to have gross returns of $275-461 on these soil types. Even with some of the higher land rents we are seeing in Kentucky for the various land productivity classes, returns look good at these price levels. For central Kentucky, subtract about $25-40 per acre from the returns in table 3 on a 50-50 rotation to account for higher nitrogen and trucking costs.

The other important factor that needs to be considered is crop insurance. Table 4 gives a proxy for the lower-bounds in returns for revenue-based crop insurance policies at an 80% coverage level. Crop insurance prices set in February are $5.68/bu for corn and $12.55/bu for soybeans. If we assume average APH yields for the farm, this would leave us with effective price levels of $4.54/bu for corn and $10.04/bu for soybeans with the 80% coverage level. Table 4 summarizes the gross returns (all costs except land rent) for the three soil productivity levels using these effective crop insurance prices. In this case, a 50-50 rotation is expected to have gross returns of $163-309 on these soil types. With this situation, these gross returns may not cover land rent in some of the most competitive regions in Kentucky. Again, for central Kentucky, subtract about $25-40 per acre from the returns on a 50-50 rotation to account for higher nitrogen and trucking costs.

 

 

 

 

 

This article was written by Greg Halich, an agricultural economist in the University of Kentucky College of Agriculture. The article first appeared in the March 26 edition of Economic and Policy Update.